Are you wondering when you should start saving for retirement?
The answer is now. Yesterday, even.
Think you’re too young? Think again. The best time to start saving for retirement is always as soon as possible. Why? Two words: compounding interest.
The Miracle of Compounding Interest
The earlier you get into a retirement account, the longer your money has a chance to grow from compounding interest. With compounding interest, the interest your money earns also earns interest. At first your money compounds slowly, but it gains momentum over time.
Think about it this way: Imagine someone gives you $1 and tells you he will double your money every day. After a week you will have $128, but after a month you will have more than $1 billion.
(Compounding interest can be a powerful force for both good and bad. When applied to your retirement accounts, it can mean serious returns on your investment. But compounding interest can also be applied to loans like credit cards. In that situation it can cost you big in interest payments. Understanding compounding interest will not only help you plan for retirement, it can also help you avoid credit card debt.)
The Value of Starting in Your 20s Instead of Your 30s
When you’re just out of college and starting your first job, retirement is often the last thing on your mind. You may still be paying off school loans or have just started saving for a home. Putting money in a retirement account, whether it’s a 401(k) program through your job or an IRA account, however, should be among your top priorities. School loans have generous interest rates and you can afford to pay them off slowly. You can’t afford to miss out on the compound interest your retirement account could be earning when you start saving in your 20s.
A few years can make a big difference in the amount of money you have when you retire.
If you start saving $1,000 per year when you’re 25 for your retirement in a Roth IRA with an expected rate of return of 10%, at 65 you’ll have $486,852 saved up. Wait until you’re 30 to start saving the same amount, and you’ll only have $298,127. Waiting just five years, just $5,000 in contributions, would cost you $188,725 in retirement funds.
You can take some of the bite out of making retirement contributions by scheduling automatic monthly payments. If you have a 401(k) the money can be automatically taken out of your paycheck so you don’t even see it to miss it.
The Importance of Envisioning Your Retirement Lifestyle
Think about the type of retirement you want. Are you planning on traveling around the world? Do you want to retire to a villa in Spain? Do you just want to live comfortably without worrying about money? Unfortunately, Social Security may not be guaranteed in the future. Whatever your hopes are for your retirement lifestyle, you’ll need to plan ahead to make them a reality.
Use our retirement planner calculator to figure out how much of your income you need to save to reach your goals. Don’t forget to factor in inflation. (Thanks to inflation $1 million won’t be worth nearly as much when you retire.) You may need to be a multi-millionaire to retire well decades from now, which is all the more reason to start saving early.
—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.